Vat threshold increase gives SMEs more choice, but not always a simpler one

Small business owners may very well be asking themselves whether they should deregister for value-added tax (Vat), following the 1 April change in the compulsory Vat registration threshold.

While the change (from R1 million up to R2.3 million) will ease the compliance burden for SMEs and offer them greater flexibility, the decision to deregister or not is far from a simple one.

For many business owners, the instinct may be to opt out. SME funder Lula cautions that the decision is far from straightforward and should be approached with careful consideration of both the financial and operational implications.

Read: Budget signals positive shift on MSME support
Budget 2026 delivers SME relief with Vat threshold increase
Vat registration threshold updated for the first time since 2009
Compulsory Vat registration threshold last increased in 2009

The threshold increase is a positive move in reducing administrative pressure on SMEs. But deregistering for Vat is not just an administrative step, it’s a tax event and that can trigger immediate tax liabilities that businesses may not have planned for.

For SMEs that now fall below the threshold, deregistration can offer clear benefits. These include reduced compliance requirements, such as no longer needing to submit Vat returns, as well as potential pricing advantages, particularly for businesses that sell directly to consumers.

If you’re selling directly to individuals, removing Vat from your pricing can make your offering more competitive, or improve your margins. But that benefit needs to be weighed carefully against what you lose.

One of the most significant trade-offs is the ability to claim input Vat on business expenses.

ADVERTISEMENT

CONTINUE READING BELOW

Once deregistered, any Vat paid on purchases effectively becomes a cost to the business.

That’s often the hidden impact.

Expenses that were previously recoverable suddenly become more expensive, which can erode the margin gained from deregistering.

Read: Budget 2026 and Vat: The quiet revenue lever Sars is pulling
Overhaul of Vat system could slash rate to 6%
Abolish the current Vat threshold altogether

The impact of this decision can vary significantly depending on the business model. For businesses with low overheads and a predominantly consumer-facing customer base, deregistration may have minimal downside. However, for businesses with high input costs or those that primarily serve other Vat-registered companies, the consequences can be more substantial.

If your customers are Vat-registered businesses, they generally expect you to be Vat-registered too, so they can claim Vat on your invoice. If you’re not, your pricing becomes effectively more expensive to them.

Cash flow is another important consideration. While being Vat-registered introduces additional administrative processes, deregistered businesses may benefit from more predictable cash flow, as all incoming revenue belongs directly to the business without Vat obligations.

Beyond the immediate decision, SMEs should also be thinking ahead. Businesses approaching the new R2.3 million threshold need to ensure they are prepared to re-enter the Vat system if required.

Once you exceed the threshold, you have 21 business days to register as a Vat vendor, and the South African Revenue Service is strict on enforcement.

ADVERTISEMENT:

CONTINUE READING BELOW

Read: What a VAT increase could mean for SMEs
Vat exclusion on electronic services from foreign business ‘extremely’ limited
Last-minute Vat reversal implications for SA businesses and consumers
Important Vat principles clarified in Capitec case

We typically advise businesses nearing around R1.8 million in turnover to start preparing by cleaning up their bookkeeping and putting systems in place to manage Vat compliance.

Ultimately, I advise SMEs to avoid viewing Vat registration as a simple tick-box exercise and instead treat it as a strategic business decision.

There’s no one-size-fits-all answer.

The right choice depends on your customers, your cost structure and your growth trajectory. What’s important is that business owners fully understand the implications before making the call.

Read: Vat remains a challenge for small businesses in tourism sector

Shaheeda Solomon is finance manager at Lula.

#Vat #threshold #increase #SMEs #choice #simpler